Thursday, March 19, 2009

How much college debt is too much?

Posted by Nicholas Hall

Student loans are usually classified as "good" debt. Like a mortgage or a business loan, borrowing for education can be a smart investment in your future. Too many of today's students and their parents, though, are taking a good thing way too far.

I get e-mails from readers who are $30,000, $40,000 or more in debt from student loans and who can't find work in their fields. Even if you graduate with the average level of education debt -- about $21,000, according to The Project on Student Debt -- you may be jeopardizing your finances. Many newly minted graduates find their loan payments are so big that they can't save for other goals, such as a house or retirement.

Four years of loans can last a lifetime. Putting off these goals to pay debt is an expensive choice. A 22-year-old's $3,000 Roth IRA contribution, for example, could grow to more than $95,000 by the time she's eligible for full Social Security benefits. Put off that contribution by 10 years, and her contribution will grow less than half as big, to about $44,000. Both examples assume 8% average annual returns.

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